1. Electricity Distribution Companies in India: Preparing for an uncertain future Prayas (Energy Group) 21th India Power Forum, th November New Delhi

2. Chronic Problems faced by DISCOMs

3. Sustained surplus in base power
India tripled its coal capacity from 71 GW to 192 GW from
~ 40 GW, (i.e. 15% of conventional capacity)  stressed assets; due to factors such as lack of demand, very high cost of power, inadequate or poor-quality fuel, unwillingness of generators to supply at contracted rates. Not a short-term transient phenomenon.
Considering the obligation for fixed cost payments, any excess capacity will contribute to the financial distress of DISCOMs or will most likely turn into NPAs.

4. Proliferation of captive consumption
Source: PEG compilation from various CEA reports
Captive consumption already 20% to 30% of total sales in few states
FY 14 to FY 15 saw 9% ↑ in Odisha, 12% in Chhattisgarh, and 34% in Karnataka

5. Open Access based sales migration, 2016-17
> 90% of open access is short term with durations > 1 day; makes power procurement planning challenging for DISCOMs
In Maharashtra, Rajasthan and Gujarat, OA as high as 20% of DISCOM HT sales

6. Increasing costs and rising tariffs
Average cost of supply (ACOS)
Actual ACOS in FY 17 – Rs.7/unit
Increasing at 6% per annum (3-5 yr CAGR)
 Around Rs 8.5/kWh in next few yrs
Tariffs
Cross subsidy significant for HT,LT industrial, commercial consumers > 130% of ACoS
Average tariffs for cross-subsiding consumers ~ Rs. 9/ unit
Power from Alternate Sources
Cost of RE power < Rs. 4/unit
> 70% of non-agri. sales with energy charges > Rs. 5/unit
Short/medium term power < Rs. 4 unit

7. Limited scope of current strategies in tackling these challenges
Improving efficiency  reduce ACoS, tariff
Heroic efforts to increase efficiency will ↓ the rate of growth of ACoS
Indicative calculations show that growth rate can reduce to 2 to 3% p.a from the current 5 to 6% p.a.
Increase could be due the need for additional capex, loan repayments and wage increase
Thus ACoS and tariffs will continue rising.
Increasing fixed charges, for same ABR
For e.g. - fixed charges doubled to reduce energy charges to retain consumers
Energy charges may reduce by 10-20% but will remain > Rs. 5/unit
High incidence of fixed charges will make shift to solar PV captive more lucrative.
Counter-intuitively, this strategy can encourage sales migration.
Reduction in tariff to retain migrating consumers
Measures such as tariff rebates and ToD rebates provided in many states such as Punjab, AP and Maharashtra
Despite such measures open access and captive consumption continue to rise
Maharashtra examples
Despite 16% reduction in tariffs via subsidy to industries, open access increased by 29% in FY16
Even with ToD rebate of Rs. 1.50/kWh, open access is the same in peak and off-peak hours

8. Increasing Viability of kW scale solar PV systems
Generation cost for such or < Rs. 5/kWh.
Even without net metering, a consumer with significant proportion of day-time load will save ~ Rs. 2/unit with rooftop solar.
In the face of policy/regulatory hurdles to net-metering/OA, consumers will also find solar + storage options viable in the near future.

9. Electric Storage, esp. Li-ion batteries
$ /kWh ( ), 80% 25% annual avg. reduction
Expected at $ 100/kWh by 2025 or even earlier. Even a lower 10% CAGR from would result in $ 90/kWh.
Extremely modular, low gestation period and multiple applications
Excel Utility, Colorado latest bids (2018)
Solar + storage: 3-3.2¢/kWh (i.e. Rs /kWh)
100% of its existing coal generation is now more expensive than these bids.
Can fundamentally change the sector planning, operation and business model of utilities.

10. Challenges before the DISCOM in near future
Result in ↑ in consumer tariffs or ↑ need for govt. subsidy
Severe financial stress  tariff shocks, poor supply quality for small consumers, stranded assets  need for repeated and larger bailouts implications for banking sector.
Naturally, such a fallout would also have serious political implications.

11. (Inevitable) Changing role of the DISCOM
Trends interdependent  rethink current business model
‘Cost-plus’ tariff determination  little incentive for improving efficiency.
Cross – subsidy based tariff design.
Uncertain demand  rethink need for base load long term power procurement

12. Suggested ideas for way forward…1
Encourage Long-term sales migration of large consumers
Minimum duration of OA to be extended to 1 year
Fixing sales migration charges (CSS & AS) for a five year period to provide certainty.
OA consumers to procure from DISCOMs only via ‘non-regulated’ tariffs, contracts
Avoid long-term, base load power purchase contracts
Revaluate need for 25 year base load PPAs, given RE capacity addition, demand uncertainty.
Given current trends, many states may not need new capacity for a decade or so.
New PPAs after rigorous analysis of demand, supply alternatives
Use analytical tools - load forecasting models, power sector models for exercise
Capacity addition planning through a public process
Agricultural demand met through solar feeders
Deploy 2-10 MW scale solar PV plants at the sub-station, where agriculture feeders have been separated.
Capacity procurement through competitive bidding and PPAs at fixed tariff for 25 years.
Significant reduction in subsidy requirement with fixed solar tariff of ~ Rs 3/kWh and rising cost of grid supply (APPC).

13. Solar Agriculture feeders - Maharashtra status
‘Chief Ministers solar feeder policy’.
1.5-2 GW tendering underway, ~ 7.5 lakh ag pumps will be solarised in ~1 yr.
Discovered price – Rs 3.1/kWh, much lower than present APPC of Rs 4/kWh.
Plans to further scale it across state.
KUSUM -

14. Suggested ideas for way forward…2
Rationalising tariff design
Move away from cost-plus regulation; explore price cap/benchmarking
Have uniform tariff slabs for all industrial, commercial and domestic consumers with consumption <300 units
High intra-category cross subsidy to ensure revenue neutrality of approach
Link tariff increase of small consumers (< 300 units) to inflation
Developing robust markets
Innovation in power procurement and contract design
More flexible instruments in the market
Provide transparent procurement options for > 1 week
Allow industrial consumers on DEEP
Develop institutional capacity to regulate and monitor markets
Move towards transparent capacity markets for procurement rather than PPA approach
Accountability for service quality
Monitoring actual supply hours.
Improve metering and billing systems- third party audits by SERCs
Public hearings on supply and service quality issues
Harnessing technology to improve efficiency- use of more real time, automatic, publicly available data for accountability.

15. Schematic representation of suggested approach

16. In summary
Unless guided by conscious policy decisions, these changes will unfold chaotically, leaving the distribution companies stranded with excess capacity and huge losses
The sufferers of such a fallout will be mostly small and rural consumers with serious implications for state level politics.
To avoid such consequences, it is extremely important to intervene at the earliest.
The impending changes can be turned into opportunities only if distribution companies, regulators, and policymakers begin acting at the earliest.

17. THANK YOU ann@prayaspune.org Prayas Energy Group